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August 23, 2012

SEC’s Schapiro Loses Money-Market Fund Fight

In a late Wednesday statement, Schapiro says she doesn’t have the votes to pass further reforms

U.S. Securities and Exchange Commission Information
This information sheet contains general information about certain provisions of the Investment Advisers Act of 1940 and selected rules under the Advisers Act. It also provides information about the resources available from the SEC to help advisors understand and comply with these laws and rules.

Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro said late Wednesday that she has lost her fight to further reform money-market funds.

In a statement, Schapiro said that three commissioners, constituting a majority of the commission, informed her that they would not support a staff proposal to reform the structure of the funds. Those proposed reforms, she said, “were intended to reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.”

Schapiro decided to cancel a vote on the reform proposal after getting word from Commissioner Luis Aguilar, a Democrat, the he would join the two Republican commissioners in voting against the proposal. Aguilar told The Wall Street Journal Schapiro's plan could have too many unintended consequences and drive investors into other unregulated corners of the short-term market.

"I'm not comfortable supporting the proposal as is," Aguilar told the Journal. He added that regulators should instead conduct a thorough review of the entire cash-management industry.

The Investment Company Institute (ICI) released a statement on Thursday stating that ICI and all its members are "pleased" that the commission will not be pursuing further money-market reforms. “Like hundreds of other organizations that have submitted their views, we have strongly opposed the structural changes to money-market funds under consideration at the SEC, because of the adverse consequences of these proposals for investors, issuers and the economy.”

Dale Brown, president and CEO of the Financial Services Institute (FSI), said Schapiro's decision to not follow through with a vote on further reforms “is a very encouraging development." Investors, he said, "look to money-market funds for liquidity, diversification and convenience, along with a market-based yield. Money-market funds also play a crucial role in meeting businesses’ short-term financing needs and form a vital link in providing financing for state and local governments." Imposing a floating NAV on the funds "is simply not in the best interests of American investors or businesses,” he said.

Schapiro’s statement is as follows:

I—together with many other regulators and commentators from both political parties and various political philosophies—consider the structural reform of money markets one of the pieces of unfinished business from the financial crisis.

While as commissioners, we each have our own views about the need to bolster money-market funds, a proposal would have given the public the chance to weigh in with their views as well. However, because three commissioners have now stated that they will not support the proposal and that it therefore cannot be published for public comment, there is no longer a need to formally call the matter to a vote at a public commission meeting. Some commissioners have instead suggested a concept release. We have been engaging for two and a half years on structural reform of money-market funds. A concept release at this point does not advance the discussion. The public needs concrete proposals to react to.

The declaration by the three commissioners that they will not vote to propose reform now provides the needed clarity for other policymakers as they consider ways to address the systemic risks posed by money-market funds. I urge them to act with the same determination that the staff of the SEC has displayed over the past two years.

As we consider money-market funds’ susceptibility to runs, we must remember the lessons of the financial crisis and the history of money-market funds. And, we must be cognizant that the tools that were used to stop the run on money-market funds in 2008 no longer exist. That is, there is no “back-up plan” in place if we experience another run on money-market funds because money-market funds effectively are operating without a net.One of the most critical lessons from the financial crisis is that, when regulators identify a potential systemic risk—or an industry or institution that potentially could require a taxpayer bailout—we must speak up. It is our duty to foster a public debate and to pursue appropriate reforms. I believe that is why financial regulators both past and present, both Democrats and Republicans, have spoken out in favor of structural reform of money-market funds. I also believe that is why independent observers, such as academics and the financial press—from a variety of philosophical ideologies—have supported structural reform of money-market funds, as well.

The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away. Money market funds’ susceptibility to runs needs to be addressed. Other policymakers now have clarity that the SEC will not act to issue a money-market fund reform proposal and can take this into account in deciding what steps should be taken to address this issue.